DOEREN MAYHEW
Lenders ’ Use of AI Models Faces Increased Scrutiny
On Sept . 19 , 2023 , the Consumer Financial Protection Bureau ( CFPB ) issued guidance about requirements financial institutions must abide by when using artificial intelligence ( AI ) and complex algorithmic models in their lending practices . These requirements largely have to do with the level of specificity that must be conveyed to applicants regarding the reasons for credit denials or a change of credit conditions . The CFPB wants to emphasize the importance of explaining the reasons for adverse actions to ensure financial institutions are abiding by fair lending practices and consumers can improve their chances when attempting to acquire credit in the future .
As the use of these complex algorithms , often marketed as AI , in underwriting models have become more common , the reasons for credit denials have expanded . These models can consider a much wider array of data , including data that can be extracted from consumer surveillance , which make it more difficult for consumers to discern why they were denied credit even when their finances meet the standard criteria . The CFPB takes issue with creditors relying solely on checklists given in agency sample forms when attempting to inform consumers using an adverse action notice . Its position is that the Equal Credit Opportunity Act ( ECOA ) holds creditors to a higher standard of disclosure than these checklists often guarantee and requires creditors to provide further explanation to consumers if the checklists alone would fail to adequately inform consumers as to why their credit was denied . The CFPB already clarified in May 2022 , that these requirements , which mandate creditors to provide consumers with accurate and specific reasons for credit denials , still need to be met when using complex algorithms ,
making it difficult to identify those reasons . Only recently did the CFPB specify the checklists available from its sample forms do not alone constitute an adequate explanation of an adverse action .
Proper Use of Sample Forms when Using Complex Credit Models
In its recent circular , the CFPB took the following position :
“ Creditors may not rely on the checklist of reasons provided in the sample forms ( currently codified in Regulation B ) to satisfy their obligations under ECOA if those reasons do not specifically and accurately indicate the principal reason ( s ) for the adverse action . Nor , as a general matter , may creditors rely on overly broad or vague reasons to the extent that they obscure the specific and accurate reasons relied upon .”
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